Ryanair boss Michael O'Leary, the unflinching king of cost-cutting, may finally have met his match in the strictness of French employment law. The Irish low-cost airline will close its only French base in Marseille this week in the latest round of a bitter war with French authorities.

O'Leary has been engaged in a stand-off with France since pilots' unions and the state took legal action against him for employing Marseille-based crew on Irish contracts rather than paying higher social security and tax in France. It is the first time Ryanair, Europe's biggest low-cost airline, has faced legal action of this kind.

A furious O'Leary, fearing large fines, said he would remove his staff and from Tuesday, Ryanair will no longer have its Mediterranean hub in the French port. Its aircraft and 200 jobs will be moved to rival airports in Spain, Italy and Lithuania in protest at what O'Leary called the "ill-judged" ways of France.

Ryanair launched its Marseille maintenance hub in 2006, boasting that it would open up Provence to tourists and "save" the French from Air France's high fares.

The French low-cost market, with its large number of UK second-home owners, is a key growth area for budget airlines like Ryanair and easyJet. The year that Ryanair based itself in Marseille, a French book called "Help! The English are invading!" detailed how airlines including Ryanair had brought an invasion of foreigners to live in secluded rural France. Local French mayors, airports and chambers of commerce had offered financial incentives to bring low-cost airlines to the regions.

Ryanair quickly became the second biggest carrier in Marseille, bringing in 1.7m passengers last year. But France's second largest pilots' union complained that staff based in Marseille were working under Irish contracts and paying no taxes in France.

O'Leary, who saved 30% on high French social charges by using Irish contracts, said he was abiding by European law because his workers were mobile and worked on "Irish registered aircraft defined as Irish territory".

French courts ruled against Ryanair, saying that employees of foreign airlines living in France come under French social security and tax law.

"Sadly, the loss of four aircraft, 200 jobs and 13 routes at Marseille is a high price necessary to demonstrate these are mobile Irish workers," O'Leary said, before axing over half of his Marseille routes and taking the case to the European court of human rights.

The row has showed how dependent the economies of smaller cities can become on low-cost air routes. The argument became political when rightwing MPs and the chamber of commerce sided with Ryanair against unions, complaining that France was backward and uncompetitive.

Jacques Pfister of Marseille's chamber of commerce said that Ryanair's presence had brought €550m into the local economy over four years, saying the court ruling was like "putting the brakes on development".

Jean-Claude Gaudin, Marseille's mayor and a key figure in Nicolas Sarkozy's ruling rightwing party in the south, wrote to the president urging him to drop the state action and scrap a decree that foreign airline workers in France should pay French tax. He said the decree, aimed at protecting Air France from competition, was obsolete. Gaudin said unions were totally irresponsible. In turn, they accused him of being O'Leary's puppet.

One local centrist MP begged O'Leary to stay, while the Communist party accused him of blackmail in threatening to quit Marseille. Ryanair said it would continue to fly 10 routes, including London to Marseille, using planes based elsewhere.

The British budget airline, easyJet, which intends to expand in France this year, has also fallen foul of French law. Last year it was fined €1.4m for breaching French labour law by hiring 170 staff under British contracts at Paris's Orly airport.